Market News and Analysis

EasyJet can boast record passengers, record loads and record capacity. But lower fares, currency headwinds and higher costs mean profits are down again.

With capacity rising 8.5%, revs were +8.1% to £5.047bn, but revenue per seat was down -0.4% at £58.23. Lower fares are still the main problem. A currency tailwind, higher ancillary revenues and better load factors were not quite enough to offset the ticket pricing pressure.

EasyJet reported an ‘aggressive pricing environment’, which left net ticket revenue per seat down -7.8%. Alleviating this, ancillary revs were + 17.8% to £986 million thanks to high load factors, which hit 92.6%, and more passengers, which rose 9.7% to 80.2m. Flogging drinks and snacks is also proving valuable – the non-seat revenue increased by 9.3% to £89 million.

Profits before tax slid 17% to £408m from a year before, but management says it took at £101m currency hit. Strip out that tailwind and profits would be higher than last year, demonstrating the efforts that have been made in the last year on cost control (Lean savings of £85m reported) and boosting ancillary revs. Nevertheless profits are about 40% down from the 2015 peak.

In October we noted that EasyJet looks set to benefit from not only Ryanair passengers rebooking over the coming months, but also absorbing the demand on routes from the collapse of Monarch. This should help with load factors over the winter, with the airline (along with Ryanair) enjoying the biggest complementary route coverage

And today the company has reported forward bookings are ahead of last year at 88% for Q1 and 26% for Q2. More importantly, Q1 revenue trends are said to be ‘encouraging’, as a result of some capacity leaving the market.

On Air Berlin, EasyJet will be taking a fairly hefty hit next year. Management expects losses of around £60 million relating to these operations in 2018, which it says is down to using wet lease aircraft with lower loads and yields. There are also one-off costs expected of £100 million, all to be absorbed in 2018. But EasyJet says the €40m deal should be earnings accretive by 2019.

Dividend at 40.9p is a little lower than expected and down 24% from a year ago. Whilst EasyJet expects dividend growth in 2018, the combination the one-off costs from the Air Berlin acquisition and continued pressures on ticket prices may cast doubt on this assertion. A lot depends on whether the currency headwinds of this year are repeated and whether higher fuel costs ramps up cost per seat.

In the last year EasyJet benefitted from a lower hedged fuel price (headline cost per seat at constant currency decreased by 4.4% to £49.96), but negative currency effects meant the actual headline cost per seat increased 2.4% to £53.52. Ex-fuel and at constant currency, cost per seat rose by 0.9% to £38.69, which was down to ‘investment in resilience’. EasyJet expects headline costs per seat, excluding Air Berlin, to be 2% lower in 2018.

Meanwhile, the problems of overcapacity in European short haul combined with a price war means it will remain tough going. In EasyJet’s markets capacity growth was 7.4% in the last year, ahead of the overall market.

However, we must note some very positive signals on pricing. Management says revenue per seat growth at constant currency in Q1 is expected to be positive ‘by low to mid-single digits’. Not only is there the benefit of capacity being taken out of the market, but management suggests this is also down to underlying improvements. There may also be the benefit of further consolidation in the industry over the next 12 months.

Kingfisher: Plus ça change as French sales drag

At Kingfisher, the same old story emerges – French sales are very weak, while Screwfix powers ahead. Plus ça change. So does management finally act to hive off either Screwfix or the French business?

France like for like sales were -4.1% lower, dragging group figures into the red. Group LFL was -0.5% despite the 10.2% jump at Screwfix, which is doing so well there will be the usual calls for management to consider splitting it off. Common sourcing savings which are targeted at £500m a year by 2021 remains the reason not to go down this route. B&Q LFL sales were also soft (-1.9% LFL and -2.9% total at constant currency) as consumers rein in their DIY spending.

France is now not just a LFL problem – total sales at constant currency were down -3.5%, versus gains of +2.5% for UK & Ireland, and +3.2% for other international. That left group total sales on constant currency basis virtually flat, albeit total reported was +3% higher.

French sales in the first half had decreased by 4.1% (-4.6% LFL) to £2.273bn, while profits slumped by almost 15% as margins came under pressure. More urgency to fix the French problem is required. Nevertheless, management is comfortable with full year profit consensus expectations and remains on track with Veronique Laury’s turnaround strategy.

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